The buyer wants to exclude our raw materials inventory from our Net Working Capital peg, claiming some of it is slow-moving. How do we defend this inventory and prevent a downward adjustment to our cash at close?

Question

Tyler Smith · Accepted Answer

Buyers love to label inventory as slow-moving to force a lower Net Working Capital peg, which effectively forces you to leave more cash in the business at close. To defend your inventory, you must bring operational data to the negotiating table. First, review your inventory turns. If you run your business on the EOS framework, you should have historical Scorecard data showing your average days-inventory-outstanding or DIO. Show the buyer that your raw materials inventory matches your actual production requirements. Prove that what they call slow-moving is actually strategic safety stock that protects your business from supply chain disruptions and maintains your high customer fulfillment rates. Next, perform an aging analysis on the inventory. Categorize the raw materials and show that they are still fully usable in your current production lines. Under the IVS 105 Market Approach, your working capital must reflect a normal operating cycle. If you have a long production cycle, carrying this inventory is a standard requirement, not an operational failure. You must negotiate a clear definition of slow-moving inventory in the purchase agreement. Do not accept a generic blanket exclusion. Insist that only inventory that has been completely inactive for more than twelve months, and cannot be used for any active customer orders, can be written down. This keeps the buyer from arbitrary clawbacks.